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Verisign Inc (VRSN 0.11%)
Q4Â 2018 Earnings Conference Call
Feb. 07, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2018 Earnings Call. Today's conference is being recorded and unauthorized recording of this call is not permitted.
At this time, I would like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead sir.
David Atchley -- Vice President of Investor Relations and Corporate Treasurer
Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's fourth quarter and full year 2018 earnings call. With me are Jim Bidzos, Executive Chairman, President and CEO; Todd Strubbe, Executive Vice President and COO; and George Kilguss, Executive Vice President and CFO.
This call and our presentation are being webcast from our Investor Relations website, which is available under About VeriSign on verisign.com. There you will also find our fourth quarter and full year 2018 earnings release. At the end of this call, the presentation will be available on that site. And within a few hours, the replay of the call will be posted.
Financial results in our earnings release are unaudited and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. VeriSign retains its long-standing policy not to comment on financial performance or guidance during the quarter unless it is done through a public disclosure.
The financial results in today's call and the matters we will be discussing today include GAAP and non-GAAP measures used by VeriSign. GAAP to non-GAAP reconciliation information is appended to our earnings release and slide presentation as applicable, each of which can be found in the Investor Relations section of our website. In a moment, Jim and George will provide some prepared remarks and afterwards we will open the call for your questions.
With that, I would like to turn the call over to Jim.
D. James Bidzos -- Chairman, President and Chief Executive Officer
Thanks, David, and good afternoon, everyone. I'm pleased to report another solid year for VeriSign. Fourth quarter and full year 2018 results were in line with our objectives of offering security and stability to our customers, while generating profitable growth and providing long-term value to our shareholders. 2018 was marked by strong financial performance during, which we generated revenues of $1,215 million, $661 million in free cash flow and 2018 full year non-GAAP operating margin of 67.5%.
2018 was a strong year for the .com and .net domain name base as the company processed 38.2 million registrations and finished the year with 153 million names. During the year, we marked more than 21 years of uninterrupted availability of the VeriSign DNS for .com and .net. As we announced on November 1, last year VeriSign and the Department of Commerce entered into Amendment 35 to the Cooperative Agreement. The amendment among other things permits VeriSign without further approval of the DOC to engage with ICANN to change the .com Registry Agreement to increase wholesale prices for .com domain name registrations and renewals by up to 7% in each of the last four years of each six-year period.
Amendment 35 also clarifies that the vertical integration restrictions in the .com Registry Agreement on VeriSign's ability to own an ICANN-accredited registrar apply only as to the .com TLD and not to other services offered by VeriSign. Additionally, Amendment 35 also removes certain unnecessary and burdensome regulations, so that any future renewal of the .com Registry Agreement can occur without DOC approval unless VeriSign were to seek changes to certain key provisions such as further changes to pricing. Any change to the Cooperative Agreement can only be made by mutual agreement of VeriSign and the DOC except that the DOC can terminate the Cooperative Agreement at any time with 120 days' notice prior to the expiration of the term.
As another update, the company completed the sale of the Verisign Security Services customer contracts on December 5, 2018. These contracts are related primarily to our DDoS and Managed DNS customers. As discussed last quarter, the sale of these non-core customer contracts will enable us to focus solely on supporting our core mission ensuring the security, stability and resiliency of our core infrastructure. Of course, the sale of these customer contracts will be a slight drag on revenue in 2019, but our continued organic revenue growth from our core domain name business is expected to offset this decrease.
At the end of December, the domain name base in .com and .net totaled 153 million consisting of 139 million names for .com and 14 million names for .net with a year-over-year growth rate of 4.5%. During the fourth quarter, we processed 9.5 million new registrations and the domain name base increased by 1.29 million names. Although, the renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the fourth quarter of 2018 will be 74.2%. This preliminary rate compares to 72.2% achieved in the fourth quarter of 2017.
Looking forward to 2019, we expect the domain name base growth rate to be between 2.25% and 4.25% for full year 2019. During the fourth quarter, we continued our share repurchase program by repurchasing 1.2 million shares of common stock for $175 million. During the full year 2018, we repurchased 4.4 million shares for $600 million. Effective today, the Board of Directors increased the amount of VeriSign common stock authorized for share repurchase by approximately $603 million to a total of 1 billion authorized and available under the share repurchase program, which has no expiration.
Our financial position remains strong with $1.27 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash including potential share repurchases.
And now, I'd like to turn the call over to George.
George Kilguss -- Executive Vice President and Chief Financial Officer
Thanks, Jim, and good afternoon everyone. For the year ended December 31, 2018, the company generated revenue of $1.215 billion, up 4.3% from 2017 and delivered GAAP operating income of $767 million, up 8.4% from $708 million in 2017. Revenue for the fourth quarter of 2018 totaled $307 million, up 4% year-over-year and up by 5.5% sequentially. As it relates to fourth quarter GAAP results, operating income totaled $194 million compared with $176 million in the fourth quarter of 2017. The operating margin in the quarter came to 63.1% compared to 59.7% in the same quarter a year ago.
Net income totaled $182 million compared to $103 million a year earlier, which produced dilutive earnings per share of $1.50 in the fourth quarter this year compared to $0.83 for the same quarter last year. In the quarter, we recorded a $54.8 million pre-tax gain related to the sale of Verisign Security Services customer contracts. This gain increased GAAP net income by $52 million and GAAP earnings per share by $0.43.
As of December 31, 2018, the company maintained total assets of $1.9 billion and total liabilities of $3.3 billion. Assets included $1.3 billion of cash, cash equivalents and marketable securities of which $504 million were held domestically with the remainder held abroad. I'll now review some additional fourth quarter financial metrics, which include non-GAAP operating margin non-GAAP earnings per share, operating cash flow and free cash flow. I will then provide our 2019 full year guidance.
As it relates to non-GAAP metrics, fourth quarter operating expense, which excludes $11 million of stock-based compensation, totaled $102 million compared to $96 million last quarter and $106 million in the fourth quarter a year ago. Non-GAAP operating margin for the fourth quarter was 66.7% compared to 68.7% last quarter and 64.1% in the same quarter of 2017. During the fourth quarter, our sales and marketing expense increased sequentially as we had additional spend on programs in the market.
Non-GAAP net income for the fourth quarter was $191 million resulting in non-GAAP diluted earnings per share of $1.58 based on a weighted average diluted share count of 121.3 million shares. This compares to $1.23 last quarter and $0.96 in the fourth quarter of 2017. The gain related to the sale of our Security Services customer contracts increased non-GAAP net income by $42.8 million and non-GAAP earnings per share by $0.36 during the fourth quarter. Operating cash flow for the fourth quarter was $219 million and free cash flow was $211 million, compared with $199 million and $190 million respectively for the fourth quarter last year.
Now I'd like to provide our full year 2019 guidance. Revenue is expected to be in the range of $1.215 billion to $1.235 billion. Our 2019 revenue range is based on our expectation for continued growth of our domain name base for the full year 2019 of between 2.25% and 4.25%, being partially offset by the loss of our revenue associated with the sale of our Security Service customer contracts.
Non-GAAP operating margin is expected to be between 67.5% to 68.5% and will continue to include certain non-material operating costs associated with providing transition services for Security Service customers. Our interest expense and non-operating income net is expected to be an expense of between $42 million and $49 million and consist primarily of net interest expense, partially offset by payments collected as part of the aforementioned Transition Services Agreement.
Capital expenditures in 2019 are expected to be between $45 million and $55 million. And finally, cash taxes are expected to be between $95 million and $115 million. In summary, the company continued to demonstrate solid financial performance in 2018 during the fourth quarter and for the full year.
Now I'll turn the call back to Jim for his closing remarks.
D. James Bidzos -- Chairman, President and Chief Executive Officer
Thank you, George. 2018 was another solid year for VeriSign. There was further expansion of the domain name base and revenues. We generated and efficiently returned value to shareholders. We entered into Amendment 35 to the Cooperative Agreement, allowing VeriSign to engage with ICANN to amend the COM Agreement to increase the price for com domain name registrations and renewals without further approval from the Department of Commerce. We concluded the sale of our Security Services customer contracts, further increasing our focus and efforts to protect, grow and manage this unique business. The success in our core business benefits our customers employees and shareholders.
We'll now take your questions. Operator, we're ready for the first question.
Questions and Answers:
Operator
Thank you, sir. (Operator Instructions) And first we'll hear from Sterling Auty with J P Morgan.
Sterling Auty -- J P Morgan -- Analyst
Yes, thanks. Hi guys. So, ICANN 35 certainly is beneficial for you guys. But given all the moving parts, can you just simply explain what is different?
D. James Bidzos -- Chairman, President and Chief Executive Officer
Sure Sterling. I think most are aware that the main points I just mentioned in Amendment 35 are that we're allowed to increase prices for .com. We have more flexibility on vertical integration for services that are not .com services and there is reduced regulatory burden for both VeriSign and the government.
And I think your question is in practice what will be different for us VeriSign. So, I'll contrast a process before and after Amendment 35. But let me just -- let me start with what will not change. Every six years, we engage with ICANN on a .com Registry Agreement renewal for which there's a presumptive Right of Renewal. That is not changed and the next renewal of the .com Registry Agreement with ICANN will occur in November of 2024. Some parts of the agreement may be changed in that process through negotiation. However, I'd note that ICANN has not historically negotiated pricing with us deferring to DOC on pricing in prior renewals.
That process -- that ICANN process is unchanged. Prior to pick up there, prior to Amendment 35, the process that followed that renewal with ICANN was that we would present the .com Registry Agreement as negotiated by us, VeriSign and ICANN to the DOC. DOC would then review it based on a two-pronged test of one, our performance on security and stability; and two, a review of whether we were "providing registry services on reasonable prices terms and conditions." And a standard applied for these tests was called the public interest standard and then DOC's consent to the COM Registry Agreement renewal following this review was required. So, they have to consent to what we had done with ICANN.
Amendment 35 founded in the public interest to allow the following. First one, for us to raise .com registration and renewal prices 7% in the back four years of each six-year period. Two, that the restriction on vertical integration was only intended to apply to .com. Three, that the review process is now streamlined such that any NTIA review any DOC review and consent is no longer required provided that the COM Registry Agreement has not changed pricing from what's now allowed, specifically, the 7% noted -- I noted a minute ago.
Also that the performance specs or SLAs in the COM Registry Agreement that we have to perform to have not been changed and also that we've not changed the vertical integration restriction on COM and that we have not changed the renewal or termination terms of the COM Registry Agreement. And five, that there's been no changes to the WHOIS services. Given all of those then consent from the NTIA or DOC to the renewal of the COM Registry Agreement is not required if these terms are not changed. So, further in such a case and absent any VeriSign and DOC mutually agreed changes, the Cooperative Agreement will automatically renew, again, without reviewing consent as is for another six-year term.
So, one could see the Cooperative Agreement will automatically renew again without reviewing consent as is for another six-year term. So one could see the Cooperative Agreement now as evergreen without further review, given the terms stay the same. NTIA has also a right to terminate the Cooperative Agreement on 120 days' notice before the end of the term.
So there is one other change which is that VeriSign agrees to quote, continue to operate the .com registry in a content-neutral manner, which of course we've always done. So that's basically Amendment 35 and what will be different for us although of course parts of the Cooperative Agreement including earlier amendments that had to be modified or deleted to make Amendment 35 work were also changed. But essentially that's it.
Sterling Auty -- J P Morgan -- Analyst
Great. Now that's very helpful.
D. James Bidzos -- Chairman, President and Chief Executive Officer
Long answer sorry about that but...
Sterling Auty -- J P Morgan -- Analyst
That's OK. But two -- I know these calls are relatively short typically so I'm going to take the opportunity to ask a couple of questions to follow up on it. The first one is, so the Cooperative Agreement has changed, but I haven't seen any news. Do you have to go back and actually refresh or change the .com Registry Agreement to now incorporate the same pricing parameters that's there in Item 35? Or is that kind of already de facto happened because of what you did with Item 35?
D. James Bidzos -- Chairman, President and Chief Executive Officer
Well, historically and in this case as well there is a process for that. There's a process for moving changes from the DOC to the Cooperative Agreement into the .com Registry Agreement. ICANN has historically as I mentioned deferred to the US government on matters relating to com pricing. But ICANN and VeriSign have an agreement to cooperate and negotiate -- there's a written agreement to operate -- cooperate and negotiate in good faith to amend the com registry as may be necessary for consistency with changes to the Cooperative Agreement.
So we have begun that process with ICANN to amend the agreement to make these changes including pricing. And I don't think I can comment further to process. We've been through it a few times. It may take a number of months to work through it, but we'll update you as appropriate.
Sterling Auty -- J P Morgan -- Analyst
All right, great. And then on the vertical integration, the way that I read that if we look back through the history of Network Solutions to VeriSign to where you are today once upon a time you were both registry and registrar. This appears to open up the ability for you to be a registrar as long as it's not for .com. Is this indicating that you would be interested in entering and becoming a registrar again, perhaps for the .web?
D. James Bidzos -- Chairman, President and Chief Executive Officer
Well first of all it was -- as I mentioned earlier this is a clarification that, that restriction only applies to .com. So .web or any other services that we offer technically are no longer covered with this modification. How that language would apply to our business, how we would use it, how it stands today? I think is it's too early to say how that flexibility might be applied, if it's applied. But that clarification is now made and the vertical integration restriction only applies to .com.
And you're right, we did have both when we acquired Network Solutions in June of 2000. And then I think it was in 2003 or early 2004 we sold off the registrar. But I think at that time the agreement read that VeriSign couldn't be vertically integrated. And I think at that time VeriSign and .com were entirely synonymous, so this clarifies that and it applies -- the restriction only applies to .com, and as I said, too early to say how or if we'll use that flexibility.
Sterling Auty -- J P Morgan -- Analyst
All right, great. Let me turn it over. And I will hop back in queue. Thank you.
D. James Bidzos -- Chairman, President and Chief Executive Officer
I'm sorry.
Sterling Auty -- J P Morgan -- Analyst
I was saying, thank you I will turn the call over to next question.
Operator
And it looks like our last question will come from Rob Oliver with Baird.
It looks like our last question will come from Rob Oliver with Baird.
Matt Lemenager -- Robert W. Baird Equity Research -- Analyst
Thanks. It's Matt Lemenager on for Rob tonight. Guys, is there any update on .web kind of what are the remaining steps there? I know that's a process. Could you kind of help us understand what the remaining steps would be there?
And then secondly on .web, what type of factors are you using to evaluate potential pricing there and what that might look like, because I think we understand, it can be unlimited or I guess unrestricted and you can charge premium pricing like you've talked about in the past. So are there any examples of what you're using to evaluate what that premium pricing might look like?
D. James Bidzos -- Chairman, President and Chief Executive Officer
Thanks for the questions. So, first of all, the update that I can offer since we last spoke on -- on the process toward delegation of .web is that one of the losing bidders in the .web auction a company named Afilias who is one of our competitors has filed an arbitration against ICANN trying to continue to delay the process. We are not parties to that arbitration yet, but we are actively seeking to join and participate in it. About your question, about pricing and what we might do two parts to that answer.
Number one is, yes .web is not a regulated TLD like .com is or even like .net is. It's a TLD that would be operating under the new form the new so-called New gTLD Registry Agreement. And those agreements do not limit pricing similar to our IDNs, which are also signed up to the same form of agreement. They only require a six month notice for any price change, but they provide complete pricing flexibility. As to what we would do, how we would do premium pricing, how we would price that .web, how we're thinking about it, I think it's very premature at this stage really to say anything.
And it just occurs to me too that back to Sterling's second question, he asked about, how we would use vertical integration, just to be complete. That ICANN process of incorporating all the Amendment 35 changes into the .com Registry Agreement pricing et cetera also applies to these other changes the clarification of what vertical integration restriction actually exists et cetera, so all that is subject to completing this process with ICANN that I described earlier.
And I apologize I'd like to tell you more about .web, but it's just premature to talk about what we would do or how we're thinking about that at this point. But your assumptions about the flexibility that .web would offer based on the agreement, it would operate under are correct. It would not be restricted and we'd have flexibility to price premiums or whichever way we chose.
Matt Lemenager -- Robert W. Baird Equity Research -- Analyst
Okay. That's helpful color. And then on the -- the next one's kind of high level. But so the domain name base for growth for 2019 the 2.25% to 4.25%, what could you tell us about what geographies are North America or international. Not looking for specific numbers or anything, but what kind of pockets of strength are you expecting there or which parts might be more of a headwind? Anything just directionally, no specific numbers, but what markets kind of look like they might be driving that?
George Kilguss -- Executive Vice President and Chief Financial Officer
Well, what I can tell you Matt is that in 2018 as we've been talking about all year, we've seen good growth from registrars in both the US registrars, in both registrars located over in the China market. So those at least in 2018 have been good markets for us for growth. As you talk about 2019, obviously we're a global business. We factor a lot of things going on into our range. But we still expect as you -- as we talked about the domain name base to grow between 2.25% up to 4.25%. So just exactly where that growth is, I mean we're not giving a specific guidance there but we do see that there's been a good growth this year and we're looking for growth in the range that we outlined in our guidance.
Matt Lemenager -- Robert W. Baird Equity Research -- Analyst
Okay. Sounds good. Thanks guys. I'll turn it back over to Sterling
Operator
And it looks like we will be taking our final questions a follow-up from Sterling with J P Morgan.
Sterling Auty -- J P Morgan -- Analyst
Thanks. We can just do this as an open forum go back for it. Just couple more, wanted to ask, I get a number of questions actually on the cash taxes and the cash tax rate. So if I just do the simplistic in and look at the cash taxes here for 2019. How should we think about actually maybe I'll just leave it to you. How should we think about the cash tax rate both in 2019 and going forward? Is this structural and they can maintain this rate or should it elevate to some other level and what would be the driving factors to that?
George Kilguss -- Executive Vice President and Chief Financial Officer
Yeah, thanks for that Sterling. So as you know in 2018, cash taxes were about $85 million and that translates to about 12% effective cash tax rate and that's compared to our GAAP taxes of about $147 million, which if you do that math that translated into an effective tax rate of about in the low-20% range.
So for 2019 as you know we've guided cash taxes to be between $95 million to $115 million. And if you do that math that still would be below our GAAP effective tax rate. And that's the result because we're still using up some foreign tax credits and state NOLs. And while we don't provide a long-term cash tax rate, we do expect our cash tax effective rate to accrete closer up to our GAAP effective rate over the next few years as we fully utilize those remaining attributes.
Sterling Auty -- J P Morgan -- Analyst
Excellent. And then the last one for me. You increased the share repurchase. I missed what you said. How much was left at the end of the quarter for repurchase before you went to the -- to $1 billion? And what was the thought in terms of the timing of now to expand, because a lot of people wonder if you would lever up again and maybe get even more aggressive on the repurchase front?
George Kilguss -- Executive Vice President and Chief Financial Officer
So, before we went back for authorization, we were just under $400 million remaining under that program before we went to the board and had it reauthorized up to $1 billion.
Sterling Auty -- J P Morgan -- Analyst
All right. Great. And then just that last part of it. Maybe an update on what your thought is around optimal capital structure the potential to maybe add debt and be a little bit more aggressive this year within that buyback.
George Kilguss -- Executive Vice President and Chief Financial Officer
Yeah. As you know, Sterling we constantly review the needs of the business and we try to make our decisions that are in the best interest of the company. And as we've talked about many times that's a pretty active process we go through each quarter. Jim and I sit down and look at the specific needs. We don't have a specific leverage target that we manage to. We try to use our protect grow and manage framework to make sure that we're maintaining the optimal level of liquidity.
At present, we're looking ahead to what investment opportunities we need to make the business grow and then we're thinking about what the appropriate return of capital is to shareholders. And so, I don't really have anything to report at this time. We continue to look at the marketplace and then what the needs of the business are and we'll continue to do that in a very active fashion.
D. James Bidzos -- Chairman, President and Chief Executive Officer
Yes and Sterling, Jim here. I would just add too that Amendment 35 was a significant event for us and in 2018 and it does afford us additional flexibility in a number of different areas and I think we've certainly talked about that enough. But just fully understanding it, and factoring it into our strategic thinking. I think is just something that we do need to consider. And so that's a process that's under way too. So, as George said there's just really nothing specific to say about at this point.
Sterling Auty -- J P Morgan -- Analyst
All right. Sounds good. Thank you, guys.
D. James Bidzos -- Chairman, President and Chief Executive Officer
Thanks.
Operator
And ladies and gentlemen, with no further questions. I'd like to turn the call back over to David Atchley for any final remarks.
David Atchley -- Vice President of Investor Relations and Corporate Treasurer
Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening.
Operator
And once again, ladies and gentlemen, that concludes our call for today. Thank you for joining us. You may now disconnect.
Duration: 29 minutes
Call participants:
David Atchley -- Vice President of Investor Relations and Corporate Treasurer
D. James Bidzos -- Chairman, President and Chief Executive Officer
George Kilguss -- Executive Vice President and Chief Financial Officer
Sterling Auty -- J P Morgan -- Analyst
Matt Lemenager -- Robert W. Baird Equity Research -- Analyst
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